During uncertain times, investors tend to find shelter in securities that have historically maintained predictability and a low-risk profile. The best place to look for such companies is in the consumer staples sector, as they tend to be non-cyclical. Two well-established companies in the sector that have managed to deliver low-volatility results and returns are The Procter & Gamble Company (NYSE: PG) and Colgate-Palmolive Company (NYSE: CL). Their brands include everyday household necessities whose demand is, in general, not affected by the underlying state of the economy.
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This is evident by the fact that both companies have increased their dividends annually for 60 or more years. Over six decades, multiple recessions and unfavorable trading environments have persisted. Yet, these companies continued to perform well and reward their shareholders with growing capital returns.
Their strength is also reflected in the current highly uncertain environment. Over the past year, the S&P 500 (SPX) has declined by about 12.8%, while PG and CL have only fallen by 6.6% and 4.5% during the same period.
My concern, however, is that due to both stocks lacking any meaningful correction lately, their dividend yields are uninspiring in the face of a rising-rates environment. Accordingly, I am neutral on both names.
Looking at PG’s & CL’s Dividends Prospects
With both companies being quite mature in the sector, investors have limited revenue growth expectations. The most significant factor when it comes to investing in PG or CL is their dividend prospects. Thus, to assess whether PG or CL is worth buying in the current market environment, we are going to first assess whether investors can rely on PG’s and CL’s dividends and what dividend growth pace one should expect.
When it comes to PG, the company has paid a dividend for 132 years and has also raised its dividend for 66 consecutive years, which is one of the longest active streaks of any company. Among the Dividend Aristocrats Index, only Dover Corporation (NYSE: DOV) and Genuine Parts (NYSE: GPC) feature equal dividend-growth track records at 67 and 66 years, respectively.
The latest dividend hike back in April was by a decent 5% to a quarterly rate of $0.9133. While this is below the current pace of inflation, PG should maintain an above-inflation pace of dividend growth, as has been the case in the past. The company’s 10-year dividend-growth CAGR stands at 5.1%, above the average inflation over the past decade.
PG’s management expects the company to achieve Fiscal 2023 diluted net earnings-per-share growth between 0% and 4% compared to last year’s earnings per share of $5.81. At the mid-point of the range (2%), this equates to $5.93, which implies a healthy payout ratio of 61.5%.
This, combined with the notion that besides PG’s products being recession-proof, they are also inflation-resistant, the company continues to offer solid dividend-growth attributes. In any case, the payout ratio appears low enough that it can support both the company’s growth initiatives and the ongoing dividend growth pace. Hence, I would argue investors can comfortably rely on it.
The case appears quite similar for CL as well, with the company boasting 60 years of consecutive dividend hikes. The company’s latest dividend increase was by a slightly humbler 4.4%, and its 10-year dividend-growth CAGR also stands at a humbler 4.6% compared to PG’s. Still, this rate is likewise higher than the average historical inflation rate and a satisfactory one for conservative dividend-growth investors.
While CL’s management has not provided a specific outlook on a per-share basis, they expect organic sales growth to be in the 5% to 7% range. This has led to analysts expecting earnings per share of roughly $3.00 for the year, also implying a healthy payout ratio of 63%.
Overall, I would say that both PG and CL should continue to deliver modest dividend growth in line with their historical averages moving forward. Their results should remain relatively robust through the current macroeconomic turmoil as well, despite the stronger dollar.
What is the Target Price for PG Stock?
As far as Wall Street’s sentiment goes, Procter & Gamble has a Moderate Buy consensus rating based on eight Buys and five Holds assigned in the past three months. At $154.54, the average Procter & Gamble stock forecast implies 24.4% upside potential.
What is the Target Price for CL Stock?
In the case of Colgate-Palmolive, the stock has a Hold consensus rating based on three Buys and nine Holds assigned in the past three months. At $80.92, the average Colgate-Palmolive stock forecast implies 17.3% upside potential.
Conclusion: Are PG & CL Actually Worth Buying for Their Dividends?
Consensus estimates suggest upside for both PG and CL, moving forward. Their dividend-growth prospects remain solid as well. However, their yields are not attractive during the current market environment. Precisely because consumer staple stocks can hold their ground during market downturns, PG’s and CL’s yields continue to reflect those of an ultra-low rates environment.
Even with the Federal Funds Rate in the 3% to 3.25% range, PG and CL yield as low as 2.8% and 2.6%, respectively. In my view, both stocks need to correct significantly before their yields become high enough (probably 3%+) to be worth the inherent risks that come with holding equities versus T-bills.
